Disney's Credit Rating Downgraded by Fitch Over Virus Impact

An empty road leads into a deserted Disney resort due to the COVID-19 pandemic in Kissimmee, Florida on May 5, 2020- Getty - H 2020
Daniel SLIM / AFP

"The uncertainty index for Disney has never, ever been this high," analyst Michael Nathanson added after the studio's latest earnings release.

Fitch Ratings on Wednesday downgraded the credit rating for The Walt Disney Company over how the Hollywood studio will weather the coronavirus outbreak in the next two years. 

The move to reduce the studio's IDR to A-, from A, with a negative outlook, follows the credit agency on March 18 revising Disney's rating outlook from "stable" to "negative" just as the coronavirus spread forced the closure of its theme parks and North American retail stores.

"Fitch's rating action incorporates our expectation that the coronavirus pandemic will materially weaken Disney's operating and credit profile through the remainder of the company's fiscal year 2020 and into its fiscal year 2021, with shortfalls driven primarily by the Parks, Experiences and Products segment," Fitch said Wednesday in a credit rating report.

Fitch added Disney was likely to take longer to reduce its debt load, which was expected to peak at the end of its current fiscal 2020 year in September, before falling back in fiscal 2022 "with the return of economic activity as the coronavirus threat diminishes."

Also on Wednesday, Moffett Nathanson analyst Michael Nathanson in his own investor note pointed to poor visibility for Disney's future business metrics to judge when its theme parks, theatrical releases and other event-based entertainment might return to normal operation.

"We have to train ourselves to look past those short-term annoying modelling questions and focus on the big picture and the long run. Yet, that, in itself, is a problem as the uncertainty index for Disney has never, ever been this high," he wrote.

Nathanson on Monday in an earlier report downgraded his rating on Disney's stock from "buy" to "neutral" due to the novel coronavirus pandemic ahead of the studio's Tuesday earnings report, and cut his price target by $8 to $112.

On Tuesday, Macquarie Capital analyst Tim Nollen reiterated his rating for Disney's stock at outperform, with a 12-month target of $140. Nollen in his investor note cited the COVID-19 impact on Disney's shuttered theme parks, delayed theatrical releases and ad revenue pressures at its media networks.

"Much of its business is dramatically exposed to covid and near-term numbers will look especially bad. But we expect these to recover, and meanwhile Disney has the answer to the long-term structural challenges in media, with much more room for subscriber growth at Disney+, ESPN+ and Hulu," argued Nollen.

Shares in Walt Disney on Wednesday closed down 20 cents to $100.88.